How Much Do Annuities Pay Monthly?

Insurance companies sell annuities to help people accumulate and then distribute their money as retirement income. Insurance companies figure out how much your payments will be based on several variables. These include how much you deposit, who will be receiving the funds (and for how long), and the rate of return offered by the issuing life insurance company.

How Annuity Payments Work

Annuity contracts are products that allow people to save for and then distribute money, in retirement. When you are near, or in, retirement, you can take an existing annuity product that has been building up money throughout the accumulation phase and annuitize it (meaning, create a stream of monthly payments from the balance).

If you don’t already have an annuity but want to take advantage of a steady stream of retirement income, you can take any savings balance purchase an immediate annuity, also known as an income annuity.

In either case, the monthly income you receive can vary widely based on the payout choices you make. Let’s take a look at how these products work and if they make sense for you based on your income needs in retirement. You can begin income payments by letting your insurance company know you would like to annuitize. The insurance company will ask you several questions such as the annuitant's age, gender, and how long you would like payments to last for and when you would like them to begin.

Alternatively, you can also purchase a separate product to fund your retirement called a single premium immediate annuity, or SPIA. A single premium immediate annuity (SPIA) allows you to use a lump sum of your assets (the principal) to purchase a guaranteed paycheck in retirement. Like the deferred annuity, the SPIA provides guaranteed income that will continue for the rest of your life, your spouse's life, or for a period of time that you choose (more on that below).

This stream of lifetime income can help retirees pay for basic living expenses or provide additional income to help cover the cost of travel or hobbies.

Income guarantees are backed by the claims-paying ability and financial strength of the issuing insurance company so it’s important to pick an insurance company with a strong balance sheet. Let's take a deeper dive into how these payments are calculated.

How Does an Annuity Pay by Type?

Annuities can provide guaranteed income for life — or for a certain period of time. They may also pay a death benefit to your beneficiary after you die. Two popular payout options are called “life” and “period certain”. A less common option is a lump-sum payout.

Life Annuities

Life annuities pay to provide income for the rest of your life. They are also referred to as single life, life only, or straight life. This payout option helps protect against outliving your money in retirement.

The income payments for a life annuity payout are determined by how much you deposit and your life expectancy. Importantly, life annuities do not guarantee money for your heirs or spouse after you pass away. For that reason, they can be risky and are best purchased by people who are not married and are in very good health.

Joint and Survivor

With this type of annuity payout, also known as joint life, your spouse is guaranteed income from the annuity after you die. This option can help your surviving spouse continue to cover living expenses with a reliable income stream when you're gone. The downside is that the payments you both will receive are less than the single-life payout option described above.

Period Certain Options

Period certain annuities only guarantee payments for a specific amount of time. This payout option lets you choose when and how long you’ll receive payments. The income you receive from your annuity is guaranteed for the time period that you specify. This income is paid to you until the period ends but if you pass away prior to the end of the payout period, your beneficiary may receive any remaining payments owed. Another period certain option is called life with period certain. It guarantees payments for life while also ensuring that your beneficiary receives the rest of your annuity payments if you pass away during the specified period. For example, let’s say you purchase a life annuity with a 10-year period certain. If you pass away after three years, there are still seven more years of contractual payments to your beneficiary. But if you die after 15 years, your beneficiary would not receive any of the annuity proceeds.

Lump-Sum Payment

Instead of annuitizing a deferred annuity, you can choose to receive a one-time, lump-sum payout. The downside to this option is that you will owe ordinary income taxes on the gains in the year you take a distribution. If you purchased your annuity with qualified funds (funds you haven’t paid taxes on) you will owe taxes on the entire amount. That could push you into a new tax bracket and should be discussed with a tax specialist.

Can You Calculate What Your Annuity Will Pay Out?

As you've seen, calculating the exact amount that your unique annuity will pay out depends on several factors. To calculate your payments, a rather advanced annuity calculator is used by the insurance company.

This calculator determines what is called the internal rate of return (IRR). The IRR is a mathematical calculation that looks at the inflows and outflows of money over time and calculates the investment return. This is important because the company needs to support the monthly commitment they made to you. Consult your insurance agent or financial advisor and ask them for an illustration that will specifically show how your monthly payments are calculated.

You can also run an illustration here that will show you how much money your annuity would earn during the accumulation phase. The most important determinant of your monthly payments will be the amount of money you start with.

Factors that Could Impact Your Annuity Payout

Determining the most appropriate annuity payout scenario depends on a number of factors, including your health, marital status, and personal financial situation.

For instance, if you have a spouse, you may want to choose a payout that will continue after you die, such as a joint-life annuity. If you have health issues, a life-only annuity may not be the best choice, since you may not anticipate living long enough to maximize the payout.

An additional factor is how much of your retirement nest egg will be tied up in your annuitized contract.

Once you annuitize, you cannot recover that money in a lump sum again. It can only be paid out to you over time. For this reason, for people with a limited nest egg, committing only a small part of the funds to an immediate annuity may be the best strategy.

Finally, if social security and other investments will be enough to support your retirement, then an income annuity may not have a place in your retirement plan at all.

Which Annuity is Right For You?

Determining the right annuity product for your personal financial situation can be tricky. Generally, if you are a conservative investor looking for guaranteed returns, then a fixed annuity might be the best choice (vs. a variable annuity that can add a risk component).

Annuities from Canvas Annuity are multi-year guarantee annuities (MYGAs) that are among the most simple fixed annuity products available. These products feature guaranteed returns that are among the most competitive annuity rates in the country. You can purchase a Canvas annuity in minutes online or over the phone which makes a Canvas Annuity a great choice for growing money that can be used for income in retirement.